Knowledge Base
Both of these issues come with tax implications that need to be addressed. Read on so you will be well-informed, moving forward.
Remote employees need to be registered in their states of residence, which means the company also needs to register its presence in those states. It can open up a can of worms when it comes to taxes.
A business needs to be registered in each state it has an employee working in. Each state has its own payroll tax laws and various ways of registering a business. While business registration may only take a couple of hours in some states, other states may take a couple of weeks to fully register.
A question each business needs to ask itself is: “Do we know where our employees are working?” Failing to keep up with a state’s tax regulations can result in significant fines and penalties. Some states now require that payroll taxes be paid electronically and they will not allow taxes to be paid if the business does not have a tax account number. This means the business could face penalties and interest for taxes being paid late due to the business not being fully registered in that state.
As you consider where your employees are currently working or where you are looking to hire remote employees, there are several important tax issues to consider.
- State tax registration processes
- Potential Double Taxation for Employees
- States with tax reciprocities
State Tax Registration Processes:
Before committing to hiring in a new state, it’s important to consider what it will take to register your company there. While this may seem like a simple process, it can actually be an overwhelming process for smaller businesses with employees working in multiple states.
Some states have multiple website portals that a business has to navigate through to submit the proper documentation while other states require the company to fax documents. Additionally, some states require tax registration at both the state and local levels. The worst culprits are Pennsylvania, Kentucky, & Delaware. Each of these states have city or township registration requirements in addition to the state-level requirements. This means the business has to work with the employee to figure out exactly which locality the employee belongs to. Pennsylvania’s official website, for example, lists 2,560 cities, boroughs, and townships that are tax locations.
Potential Double Taxation for Employees:
Employees who decide to work from different states than their employer may face double the tax obligations in some states. This is called the convenience of employer rule. Seven states (Arkansas, Connecticut, Delaware, Massachusetts, Nebraska, New York, and Pennsylvania) have these tax laws and each state has different rules and stipulations for how it works. In general, these laws hold that, if a person works in a different state than their employer and that the person does so by choice, not because their job requires them to, the employer’s state has the right to tax them.
For example, if your company is based in Arkansas and you have employees that work from home in Missouri, you may be required to withhold taxes from their paycheck in both Arkansas and Missouri. If your company is in one of these seven states, it is important to research what those rules are and to check with your payroll provider to make sure you and the employee understand the full scope of the law.
States With Tax Reciprocities:
While states generally will do whatever they can to collect taxes from remote employees, there is an exception to the rule. There are seventeen states that have a reciprocal agreement with at least one other state, and most of these agreements are between states that border each other. However, Arizona is an exception to that rule, in that Arizona has reciprocal agreements with California,Indiana, Oregon, and Virgina. The other states with reciprocal agreements are: District of Columbia, Illinois, Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Montana, New Jersey, North Dakota, Ohio, Pennsylvania, Virginia, West Virginia, and Wisconsin.
An employee, who lives in one state and works for a company based in another state with which their home state has a reciprocity agreement, only has to pay taxes for their home state. For example, an employee who lives in Indiana but works for a company based in Illinois would only have to pay income taxes in Indiana, thanks to the states’ tax agreement. This reduces the tax burden for employees, effectively the same as increasing their incomes, which can be a helpful consideration when hiring remote talent.